The RICS Draft Professional Standard, Affordable Housing Developments – Valuation Considerations 1st Edition, is out for consultation until 28th March 2024. 

The new Draft Professional Standard (DPS) aims to assist practitioners in the valuation of affordable housing development land. It will replace the Valuation of Land for Affordable Housing Guidance Note, which was published in 2016, and provides a welcome update in the context of the ever-evolving world of affordable housing development.  

Affordable housing tenures can be confusing, especially in the capital since the introduction of the London Affordable Rent, London Living Rent and London Shared Ownership tenures through the Mayor’s Affordable Homes programme. With this alphabet soup of affordable tenures, it is more important than ever to understand the value of individual tenures. 

The ever-changing landscape is evidenced by the fact that the DPS is already out of date as a result of the recent amendments to GLA grant funding as well as the much-anticipated Discounted Market Rent (DMR) income cap increases expected to be introduced later this year.  

RECENT CHANGES TO GLA GRANT FUNDING REGIME

In early March 2024, the GLA issued grant funding guidance on the Accelerated Funding Route (AFR) to all of its Investment Partners.  

Prior to the introduction of the AFR, GLA grant funding was only applicable to ‘additional’ affordable housing over and above a ‘grant free’ 35% provision and, in exceptional circumstances, affordable housing above a grant free 20% affordable provision. 

The AFR now allows for projects delivering 40% or more affordable housing (by habitable room), to allocate grant to all homes above the first 20% (which should be delivered as affordable without grant) whilst still allowing developers to follow the Fast Track Route under the London Plan. 

The AFR also opens the possibility of securing a grant for the first 20% of affordable housing on “key strategic sites” following the GLA's detailed scrutiny of the proposals' viability. 

Previously, grant rates were negotiated and varied on a site-by-site basis. The AFR now sets out fixed grant rates, providing developers with certainty of the level of grant available by tenure.

• Social Rent - £170,000 per home 
• London Living Rent - £80,000 per home
• Shared Ownership - £55,000 per home

This marks the return of the popular ‘Developer-led’ route, which was available under the previous 2016-21 Affordable Housing Programme, with the GLA acknowledging the headwinds the residential development sector currently faces. 

AFFORDABLE HOUSING FOR BTR

With the continued rise of Build to Rent (BTR) development in London, the level of discount applied to affordable homes within schemes has come into sharp focus in recent years. 

Rather than an arbitrary discount to Market Rent, which has historically been applied to arrive at the BTR-specific Discount Market Rent (DMR) tenure, the GLA consider “genuinely affordable” rents to be those that are affordable to household incomes of no more than £60,000 per annum.

In London, this currently reflects a maximum rent of £1,400 pcm. This is arrived at by the following calculation:

• Gross Household income = £60,000
• Less 30% income tax = £42,000 net household income
• Assume 40% of net income goes on rent = £16,800 per annum or £1,400 per month 

Both London Living Rent and DMR rents are currently capped at £1,400 pcm across London. As a result, the discount to Market Rent could be significantly higher than the 20% that some continue to assume, particularly on larger unit types in higher-value locations.

Following pressure to increase the £60,000 pa household income threshold (with the recent growth in rents and the emergence of more BTR schemes in more central locations), the 2023 consultation on the Draft Affordable Housing LPG proposed an increase of the cap from £60,000 pa to £67,000 pa. This would increase the rental cap from £1,400 pcm to £1,560 pcm. It is anticipated that a new income cap will be introduced by the end of 2024 and will have a significant impact on the viability of BTR schemes. 

The DPS, new flexibility of GLA grant funding, and anticipated increase in DMR income caps are all welcome changes that will provide more clarity in the market and continue to support the delivery of much-needed affordable housing in London. 

For further advice on affordable housing, please contact one of the team: For Red Book acquisition and disposal valuation advice, contact Henry Collins; for affordable housing agency and S.106 advice, contact Harry Wackett; and for stock transfer / EUV-SH / MV-T advice, contact Chris Ramsden.